The overall objective of this three-year research project is to gain a better understanding of variation in state subsidies of long-term care services and the effects of this variation on decisions families with disabled elderly persons make about: living arrangements--living independently versus living with younger persons versus institutionalization, and on transfers of care and money from relatives and friends to the disabled elderly. We will document state variation in Medicaid eligibility, benefit structures, and long-term care reimbursement policies and entry (certificate of need) regulations by surveying state agencies, state nursing home associations, and lawyers specializing in obtaining Medicaid benefits for clients. We will develop a two-stage model to provide a framework for understanding the elderly person's living arrangement choice and amounts of informal and formal care and private cash transfers obtained at each site. First, the person decides on a living arrangement, given various anticipations. Second, informal and formal care amounts are determined conditional on a location having been selected. Our model, which will consider interactions between caregivers and receivers, will focus on the role of public subsidies on family decisions. We will also conduct a detailed analysis of the process of spending down to Medicaid eligibility. Differences among states as well as among individuals in the spenddown process will be emphasized. The empirical analysis of spenddown to Medicaid, living arrangement, informal and formal care and private cash transfers received, and caregivers' decisions about how much informal care to provide will be conducted with national samples from the 1987 National Medical Expenditures Survey, the 1989 National Long-Term Care Survey, and the 1984-90 Longitudinal Supplement on Aging. We anticipate preparing at least five papers. The papers documenting state policies and the spenddown process will have a policy orientation. The papers on living arrangements and private transfers, aimed at economic audiences, will provide empirical tests of our model of family decisionmaking with emphasis on the role of prices and state subsidies.